plant and equipment are usually designed to operate at a target production level. Operating below the target output level results in some excess capacity. In the below-target output range, production can be increased more than proportionately to increases in variable inputs. At above-target output levels, fixed factors are intensively used, and the law of diminishing returns takes over. There, a given percentage increase in variable inputs results in a smaller relative increase in output.
The relation between short-run costs and the productivity of variable input factors is also reflected by short-run unit cost curves, as shown in Figure 8.1(b). Marginal cost declines over long-run cost curve
Cost-output relation for the optimal plant in the present operating environment the range of increasing productivity and rises thereafter. This imparts the familiar U-shape to average variable cost and average total cost curves. At first, marginal cost curves also typically decline rapidly in relation to the average variable cost curve and the average total cost curve. Near the target output level, the marginal cost curve turns up and intersects each of the AVC and AC short-run curves at their respective minimum points.3
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